Lockheed Martin Wins a $2.3 Billion Weather Satellite Contract. That’s Not Necessarily Good News.

Good news for Lockheed Martin (LMT -0.01%) investors: Last week, Lockheed announced a large follow-on order for government weather satellites. The National Oceanic and Atmospheric Administration (NOAA) asked the aerospace and defense giant to build it at least three, and potentially as many as seven, new next-generation Geostationary Extended Observations (GeoXO) sats. If all options are exercised, the total contract value will reach $2.3 billion.

Bad news for Lockheed Martin: That works out to $324.3 million per satellite.

Wait: $300 million for a satellite is bad news?

Yes, you heard me right. Lockheed making $300 million-plus off of each weather satellite it sells the government could very well be bad news for this government contractor in the long term. Here’s why.

Lockheed has been supplying NOAA with weather satellites for more than half a century. Its current constellation, the GOES-R series of geostationary weather satellites, comprises four satellites tasked with imaging “severe storms, hurricanes, wildfires, and other weather hazards,” identifying the source of volcanic eruptions (even undersea ones), tracking surface temperatures on Earth, and even giving early warning of incoming solar flares.

That’s an awful lot of data to be getting for just $300 million.

And the new GeoXO series of satellites will be even more advanced, offering “more accurate weather forecasting” and upgraded capabilities such as monitoring ocean and air pollution. But here’s the potential risk to this program: Lockheed doesn’t expect the first GeoXO satellite to be ready for launch before the “early 2030s,” and this satellite line is expected to continue operating well into the “late 2050s.”

Bigger, slower, pricier versus smaller, faster, cheaper

Why could this be a problem for Lockheed Martin? Start with the fact that newer space stocks are producing smaller satellites that can perform the same functions as GOES, or GeoXO, and for far lower prices.

Take Planet Labs (PL 1.09%), for example. With 200 Earth observation satellites orbiting the Earth once every 90 minutes, Planet Labs’ constellation of Dove satellites already provide “high-resolution, continuous, and complete view[s] of the world from above.” And at an average cost of just $300,000 each, Dove costs less than 0.1% of the cost of a single GeoXO satellite. For that matter, Planet Labs’ entire constellation costs just 18.5% of the cost of a single Lockheed Martin GeoXO.

The Dove constellation is also being continually upgraded as old satellites fall out of service to be replaced by newer, better satellites, such as the company’s new Tanager class, which are being tasked with pinpointing sources of carbon dioxide and methane emissions on Earth — the very kind of environmental work you’d ordinarily expect a big GEO satellite like GOES or GeoXO to do.

Or consider Spire Global (SPIR 0.37%), another small satellite company with 100 nanosatellites in orbit. NOAA hired Spire earlier this year to help with “operational weather forecasts, space weather models, and climate research.” The cost of that weather work: Just $9.4 million.

Granted, these tiny satellites might not be as powerful or as long-lived as Lockheed’s mega-satellites. But they can be built and launched much faster — no need to wait for the “early 2030s.” And Spire’s goal is to provide “80% of a mission’s goals at only 20% of the cost” of the larger satellites that Lockheed builds — and Spire has the receipts to prove it can be done.

What it means for investors

It’s in this kind of cost benefits analysis that I see future risk for Lockheed’s large satellite business. Giant-size contracts such as GeoXR — and at $2.3 billion, GeoXR’s total cost approaches 10% of NASA’s annual budget — are at higher risk of cancellation when money gets tight. (And with the U.S. national debt approaching $35 trillion, I’d say money is looking kinda tight right now.) 

If and when Washington gets serious about reining in government spending to a more supportable level, contracts like Lockheed’s are going to be at greater risk of cancellation, while budget-friendly contracts like Spire’s and cheaper alternatives like Planet’s are going to be more in favor.

All of this is to say, if you’re a Lockheed Martin shareholder, go ahead and cheer the company’s $2.3 billion win today. It’s a great contract, bringing lots of revenue, and will probably be profitable for Lockheed, given the 8.9% operating profit margin of the company’s Space division. (According to data from S&P Global Market Intelligence, that’s actually a bit subpar for Lockheed, which averages 13% profit margins across its four main divisions — but still, 8.9% is not too shabby.)

Just don’t be too confident that this contract will be fulfilled or count its revenue before it’s “hatched.” Smaller satellites, launching quicker at lower prices and with continual upgrades, seem a safer bet to me.